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Rejuvenating regionalism

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Regionalism can have three dimensions: trade integration, regulatory cooperation and infrastructural coordination. In a thought provoking blog, Shanta Devarajan argues for a drastic shift in focus, away from trade and towards infrastructure.

Regional trade agreements do sometimes divert not just trade but attention from other beneficial forms of cooperation. And what type of integration makes economic and political sense, in what sequence, differs across regions. But it would be wrong to exclude trade, to focus only on one dimension, and to ignore important new constraints and old questions.

First, Shanta is too harsh on trade agreements. Newer agreements are venturing into services trade, government procurement and a lot more (though they still do not fully address regulation and infrastructure). Alen Mulabdic, Michele Ruta and I find that such “deep” trade agreements are more trade creating and less trade diverting than shallow agreements which focus primarily on tariffs. That is because aspects like customs reform are public goods and increase trade with all partners.

Second, regulatory cooperation can indeed have big payoffs even if it involves some loss of national sovereignty. In May 2000, the Eastern Caribbean Telecommunications Authority (ECTEL), the first regional telecommunications authority in the world, was set up with World Bank support. Apart from realizing economies of scale in regulation, it enhanced bargaining power in negotiations with the monopolist incumbent. The cost of a call from these countries to the United States fell by between 24 and 42 per cent.

Third, as Shanta argues, infrastructural coordination and domestic reform could be mutually stimulating, especially in utilities. The World Bank played a catalytic role in supporting the regional initiative to create the Eastern Africa Submarine Cable System (EASSy). Participating countries split the high cost of the cable and domestic monopolists were induced to interconnect and provide access to rivals. The result was a big boost to connectivity.

But the gains from multi-dimensional cooperation are even greater. The returns to investment in interconnecting road railway and tracks are bigger if trade in goods and services is liberalized so that trucks and trains, goods and people can move without restrictions. The flow of digital services across interconnecting cables is most fluent when regulations on privacy, professions and finance match across jurisdictions.

So, the first question: how can we move beyond a mostly country-driven approach and do more to foster regional cooperation along these dimensions?

This question is important, because I do not share Shanta’s optimistic view that integration will be self-propelling.

A key impediment to regional cooperation is asymmetric size and power (India in South Asia, Kenya in East Africa) – what Shanta calls the 800 pound gorilla problem. But he suggests that the large countries may choose to make concessions because they have little to lose and public relations points to gain.

But the US threat to renegotiate NAFTA and other agreements has introduced a new “intertemporal bargaining” twist. Small neighbors may be much more suspicious now that concessions by a dominant country today could lure them into a more vulnerable dependency tomorrow. The irreversible costs Mexico incurred to change its economic structure to serve the US market post-NAFTA have reduced its bargaining power today.

Therefore, the second question: as old compacts crumble,how can we create new mechanisms to lend credibility to regional deals or to insure participants against default or renegotiation?

Shanta argues that in situations of regional conflict, allowing “the private sector to trade and integrate” could be a solution. But creating that freedom from policy impediments would presumably be the point of the “elusive” regional trade and investment agreement. We are faced with a chicken-and-egg problem.

Which prompts the third question: how can we identify specific dimensions of regional cooperation for which there is immediate political support, and which could help unleash a virtuous and ever-widening cycle of integration?